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Monday, 23 January 2012

Malaysia: Infrastructure sukuk receives a major boost

Infrastructure sukuk has received a major boost when Projek Lebuhraya Usahasama Berhad (PLUS Berhad) last week closed a record landmark RM30.6 billion sukuk issuance program comprising both government guaranteed (GG) and non-government guaranteed AAA-rated (AAA) issuances of varying tenors, sizes and expected returns and yields to maturity (YTMs).

The issuance was through PLUS Malaysia Sdn Bh, which is a jointly-owned special purpose company of UEM Group Berhad and the Employees Provident Fund (EPF), which was set up to acquire the Malaysian business and undertakings including the assets and liabilities of PLUS Expressways Berhad, the major provider of expressway operation services in Malaysia, under a privatization exercise (proposed acquisition). Following the completion of the proposed acquisition, PLUS Malaysia's wholly-owned subsidiary, PLUS Berhad will acquire all the assets and liabilities of the respective concession companies via the issuance of the GG Sukuk and AAA Sukuk Musharaka.

The program, according to lead arranger and Principal Adviser, CIMB Investment Bank, comprised RM11 billion of GG issuances and RM19.6 billion of AAA issuances and are based on a bought deal and private placement basis. The non-government guarantee component could be increased to RM23.35 billion.

It is no secret that national road agencies from several countries, especially those in emerging countries, have been watching the PLUS offering closely with the hope of attracting investors to participate in their own road expansion and rehabilitation programs with the strong interest and therefore possibility of issuing Sukuk to do this against toll roads operated by these agencies.

Countries with huge areas such as Saudi Arabia, Turkey, India, South Africa, China, Pakistan, Iran, Egypt and do on, whose road infrastructure needs further development and rehabilitation, in particular could use competitive financing alternatives such as Sukuk to fund these needs based on innovative and fair revenue models.

Two national road agencies — one from a Muslim country and the other from a non-Muslim country — have in fact confirmed that they have initiated feasibility studies and preliminary discussions to issuing sukuk as part of their source of funding diversification strategies. The major problem is lack of familiarity about the structures of Sukuk; issues relating to prohibitive demands on collateral and guarantees; lack of legal infrastructure in the domicile of the potential new issuers; and concern over the Shariah compliance of such issuances.

One of the national road agencies stressed that it has had discussions in the past with several potential lead managing suitors for a potential sukuk, but discussions did not progress because of legal limitations over asset ownership.

With the difficult global bond market conditions, there are signs that infrastructure companies are seeking to diversify to other funding sources in addition to the traditional equity and government budget financing. Sukuk is emerging as an attractive and viable alternative.

A few months ago, for instance, Syarikat Prasarana Negara Berhad, the Malaysian public infrastructure company wholly-owned by the Ministry of Finance, successfully closed its RM2 billion Sukuk Al-Ijarah offering under its RM4 billion nominal value sukuk program, whose proceeds will be used mainly to part finance the Kelana Jaya and Ampang LRT Line Extension Project and other infrastructure improvement initiatives by Prasarana. The issuance is guaranteed by the Malaysian government.

Prasarana usually issues only conventional bonds to finance its activities. The company was set up to facilitate, undertake and expedite public infrastructure projects approved by the government and together with its group of companies are also asset-owners and operators of several public transport providers, namely the Ampang and Kelana Jaya lines, KL Monorail system, bus operations in Klang Valley and Penang, as well as the cable car services in Langkawi.

This RM2bn issuance was the first time that the company tapped the Islamic capital market with a sukuk issuance, and according to Prasarana Chief Executive Officer Shaipudin Shah Harun, there will be further finance raising forays in the future to fund the company's expansion plans, and Parasarana is committed to contribute to the further development of the Malaysian sukuk market. This issuance was actually structured in 2009 by joint lead managers and arrangers AmInvestment Bank and CIMB Investment Bank, with Bank Islam Malaysia acting as co-manager. But the issue was delayed due to the impact of the global financial crisis which badly affected pricing and yields in both the conventional bond and sukuk markets.

Sukuk and infrastructure should be a natural fit. While the sukuk market has flourished over the last four years, these have concentrated more on raising finance for balance sheet purposes; refinancing existing more expensive debt including very often conventional finance debt; overcoming the mismatch between short-term deposits and longer term liabilities by raising longer term financing; and providing working capital and funds for expansion.

Sukuk for development and infrastructure projects such as pure project sukuk have been hardly a feature of the sukuk landscape, although there have been a few exceptions. This is surprising given the estimated multi-trillion dollar infrastructure spend in the IDB member countries over the next decade or so.

The latest PLUS Sukuk Program, whose issuer and obligor is provides an ambitious financing conduit for the toll road services operator, which some observers stress would only be possible in a country such as Malaysia where the government is a proactive supporter of involving Islamic finance in the economy together with conventional financing options under its economic transformation program (ETP).

The GG issuances comprised two tranches of RM5.5 billion each — the one with a tenor of 26 years with a periodic distribution rate of 4.86 percent and the other with a tenor of 27 years and 353 days with a periodic distribution rate of 5 percent respectively.

The AAA issuances, which are Sukuk Al-Musharaka, comprised a total of 21 tranches with tenors ranging from 5 years to 25 years with a periodic distribution rate ranging from 3.9 percent to 5.75 percent respectively.

PLUS Expressways operates and maintains 973 kilometers of inter-urban toll expressways in Peninsular Malaysia, stretching from the border of Thailand in the north to the border of Singapore in the south, linking all major cities on the west coast of Peninsular Malaysia.

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